Consolidation: What it looks like in dermatology

Bill SouthwickIt seems as though merger and acquisition announcements in healthcare are happening weekly, as payers, hospitals and more join forces to become more powerful players in an increasingly complex healthcare environment.

What’s happening with the big corporations has trickled down to private physician practices. The trend to consolidate into larger groups of practices or enter into agreements with practice management companies has been going on for some time in other specialties. Now it’s taking hold in dermatology, according to Bill Southwick, CEO of QualDerm Partners, a company that develops dermatology practice partnerships through acquisition. Southwick presented, “Consolidation in the market. What does it mean to you?” during the March 2017 American Academy of Dermatology (AAD) annual meeting in Orlando, Fla.

Consolidation, Southwick says, is something many small and solo dermatology practices are considering.

“As dermatologists, the smaller you are, the less you ultimately could matter in a particular geographic area,” he says.

While some dermatology practices are trying to form their own groups, the most common approach is for practices to join with or be acquired by dermatology management companies, according to Southwick.

QualDerm Partners is among the management companies. Others include Advanced Dermatology, Forefront and U.S. Dermatology (formerly Dermatology Associates).

“By last count there are about 17 of us out there,” Southwick says.

Dermatologists’ ultimate relationships with practice management companies differ. Some sell 100 percent of their practices and become management company employees, who are under contractural terms and conditions.

“This depends on state regulations. Some states have what they call corporate practice of medicine rules, and you’re not allowed to hire a physician directly,” Southwick says. “There are other models where we look to partner with physicians, so we’re buying some of the practice with a purchase price of cash and the other part is shared equity in a joint venture.”

Next: Benefits, drawbacks of consolidation

Benefits, drawbacks of consolidation

A benefit of consolidation is that dermatology practices are more likely to get fair market value for their practices if they sell to or partner with a management company, he says. That’s because younger dermatologists go into practice with medical school and residency debt and, therefore, may not be able to pay fair value for a practice. So, they might buy only a practice’s assets or a portion of the accounts receivables.

Practice management companies also assume the back-office work associated with regulatory requirements, reimbursement, human resources and IT, he says.

“Physicians are consistently frustrated by the regulatory requirements that become more and more burdensome every year. Running a practice is very difficult and trying to do that and manage a patient base creates very long hours and contributes to physician burnout and frustration,” Southwick says. “So, having someone do the back office [work] for them becomes attractive.”

And being part of a larger network of practices helps protect dermatology practices from being left out of payers’ narrowing networks.

“One of the ways that an insurance company will try to curtail costs is to narrow the network it has of providers available to see patients. In more urban markets, there’s a particularly high risk (of being left out of the network),” he says.

Potential drawbacks of selling all or part of one’s practice to a practice management company could include loss of autonomy and nimbleness in decision making, depending on the partnership structure, Southwick says.

While dermatologists, whether they sell all or part of their practices, retain varying degrees of their practice philosophy and culture in day-to-day practice, they are not in total control.

“Inevitably, when you become part of something bigger, you don’t always have the same autonomy you have being small. You may not have the single person decision making that you’d like to have,” he says.

Next: Dermatologists should know what they're getting into

Dermatologists considering this route should know what they’re getting into, he says. They need to understand the culture of the practice management company, as well as the requirements of them and their practices stipulated in their partnership agreements.

“That’s very critical because it’s a long-term relationship,” Southwick says. 

Dermatology practices that derive all their revenue from elective cosmetic procedures can remain small without some of these concerns. However, they maintain a higher risk of changes in the economy since these procedures tend to be only patient paid, according to Southwick.

“There are dermatology practices that will be exclusively if not all cosmetic, but I wouldn’t consider that to be the norm. I think people underestimate the importance that being part of a payer network has in dermatology,” Southwick says. “[Still, consolidation] can even be important in cosmetics, because cosmetics has a certain need for marketing and advertising and that doesn’t come with a smaller  practice’s budget.”

Southwick says that while QualDerm Partners has from 10 to 12 dermatology practices in its portfolio, he expects the company will quadruple that by year’s end. QualDerm’s dermatologists vary in age from their 30s to 60s, with the older dermatologists tending to gravitate toward selling their practices outright. The younger derms seem to prefer selling only a portion of their practices, he says.

Consolidation is only going to increase, according to Southwick.

“The threat of being excluded from a narrow network and the threat of getting in regulatory hot water, I think, have pushed physicians to the point where they’re saying, ‘I just can’t do it all.’ They want to join something larger, where much of that is taken care of for them, and they can maintain the same philosophy of how they take care of patients,” he says.